The Rise and Rise of Crypto Lending

Crypto lending has taken off in a big way over the past 12 months, with both centralized and decentralized platforms giving users the opportunity to borrow and lend. The arrival of lending in crypto provides yet another use case for blockchain technology, particularly the smart contracts favored by DeFi protocols, while also drawing tremendous liquidity into the market.

The ability to obtain cash loans backed by crypto, crypto loans backed by real-world assets, such as property, or loans in your choice of asset backed by – wait for it – nothing at all is undoubtedly a cause for celebration. And while unsecured borrowing might sound like the embodiment of risk, it should be noted that loans aren’t automatically dispensed to all and sundry – the eligibility of borrowers depends on factors such as income, savings or credit history.

For the most part, crypto lending protocols are every bit as judicious as banks when it comes to deciding who can acquire a loan. The difference is that smart contracts and algorithmic systems handle the heavy lifting, facilitating peer-to-peer loans that make banking the unbanked and hard-to-bank a realistic possibility.

The lending landscape

According to ​DeFi Pulse,​ crypto loans dispensed by Ethereum-based DeFi protocols have generated annual interest of $687 million. While DeFi has been a driver of lending growth, major centralized exchanges such as Binance have also gotten in on the act. On that platform alone, no fewer than 58 flexible savings products are offered. All told, estimates suggest that ​over $70 billion in loans will be generated in crypto by 2022.

Needless to say, the terms of crypto lending vary according to a multitude of factors such as the asset you are depositing or borrowing (specifically its volatility) and the length of time scheduled for repayment. Moreover, the type of loan itself entails its own terms – while some loans are collateralized, others are overcollateralized or undercollateralized. There are also flash loans, which are dispensed and repaid within a single block confirmation and generally utilized by professional arbitrageurs.

Leading lenders at a glance

DeFi Rate provides a helpful snapshot of several major lending platforms, giving an at-a-glance view of how protocols compare in terms of interest rates (fixed and flexible) offered on assets such as BTC, ETH, DAI, MKR and EOS. As well as showing the current rate, DeFi Rate also provides the 30-day average so users can get a handle on the sort of rates to expect, whether their intention is to obtain a loan or stake some of their crypto to earn interest.

Interest rates are highly competitive, particularly when compared to those offered by big banks. Indeed, with numerous major financial institutions now using negative interest rates, account holders are actually being ​charged b​y banks to store their cash. The very idea of storing wealth in a bank is anathema to many crypto users.

The major players in crypto lending at present include Compound, Aave and Maker, with interest rates starting from 0.35% and rising upwards of 10%. Amazingly, Compound has over $3.5 billion of outstanding loans under its books, with interest-per-year (IPY) of $460 million. Compound’s algorithmically-operated, decentralized protocol depends, like several others, on lenders and borrowers interacting directly while earning or paying a floating interest rate.

Centralized credit lines via platforms such as ​Nexo,​ meanwhile, provide a service more akin to big banks, with users subjected to know your customer/anti-money laundering processes (KYC/AML). There are some benefits over and above, though anathema – for example, credit lines are instantly available after depositing your collateral, with the limit calculated on the basis of your stake. Moreover, Nexo benefits from both a $375 million insurance fund and state-of-the-art cybersecurity, with support for a slew of cryptocurrencies.

Lendefi is another intriguing option – secure, trustless and with support for both undercollateralized and collateralized loans. The advantage of the former, of course, is that users can borrow more than their collateral would typically entitle them to. In order to assure protection against the risk of default, Lendefi retains the collateral in an escrow account. The second-generation DeFi protocol is controlled by the community, which participates in governance via the platform’s decentralized autonomous organization (DAO) and its deflationary LDFI token.

The inexorable rise of crypto lending platforms proves one thing – banks are no longer the only show in town. A fairer and more accessible means of acquiring credit and earning interest has emerged, and with so much intense competition among platforms, it’s a good time to be a consumer.

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